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[Federal Register Volume 76, Number 165 (Thursday, August 25, 2011)]
[Notices]
[Pages 53162-53164]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21645]

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COMMODITY FUTURES TRADING COMMISSION

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65153; File No. S7-32-11]

Acceptance of Public Submissions Regarding the Study of Stable 
Value Contracts

AGENCY: Commodity Futures Trading Commission; Securities and Exchange 
Commission.

ACTION: Request for comment.

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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(the ``Dodd-Frank Act'') was enacted on July 21, 2010. Section 719(d) 
of the Dodd-Frank Act mandates that the Commodity Futures Trading 
Commission (the ``CFTC'') and the Securities and Exchange Commission 
(the ``SEC'' and, together with the CFTC, the ``Commissions'') jointly 
conduct a study to determine whether stable value contracts (``SVCs'') 
fall within the definition of a swap. Section 719(d) of the Dodd-Frank 
Act also requires that the Commissions, in making that determination, 
jointly consult with the Department of Labor, the Department of the 
Treasury, and the State entities that regulate the issuers of SVCs. 
Further, Section 719(d) of the Dodd-Frank Act provides that if the 
Commissions determine that SVCs fall within the definition of a swap, 
they jointly shall determine if an exemption for SVCs from the 
definition of a swap is appropriate and in the public interest. In 
connection with this study, the Commissions' staffs seek responses of 
interested parties to the questions set forth below.

DATES: Please submit comments in writing on or before September 26, 
2011.

ADDRESSES: Comments may be submitted by any of the following methods:

CFTC

     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Please submit your comments using only one method. ``Stable Value 
Contract Study'' must be in the subject field of responses submitted 
via e-mail, and clearly indicated on written submissions. All comments 
must be submitted in English, or if not, accompanied by an English 
translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the CFTC to consider information that 
you believe is exempt from disclosure under the Freedom of Information 
Act, a petition for confidential treatment of the exempt information 
may be submitted according to the procedures established in section 
145.9 of the CFTC's regulations.\1\
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    \1\ 17 CFR 145.9.
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    The CFTC reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse, or remove any or all of 
your submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, including obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under applicable laws, and may 
be accessible under the Freedom of Information Act.

SEC

Electronic Comments

    Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml);
    Send an e-mail to rule-comments@sec.gov. Please include File 
Number S7-32-11 on the subject line; or
    Use the Federal eRulemaking Portal (http://www.regulations.gov). 
Follow the instructions for submitting comments.

Paper Comments

    Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090. All submissions should refer to File Number 
S7-32-11. This file number should be included on the subject line if e-
mail is used. To help us process and review your comments more 
efficiently, please use only one method. The SEC will post all comments 
on the SEC's Internet Web site (http://www.sec.gov/rules/other.shtml). 
Comments are also available for Web site viewing and printing in the 
SEC's Public Reference Room, 100 F Street, NE., Washington, DC 20549, 
on official business days between the hours of 10 a.m. and 3 p.m. All 
comments received will be posted without change; the SEC does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: CFTC: Stephen A. Kane, Consultant, 
Office of the Chief Economist, (202) 418-5911, skane@cftc.gov; or David 
E. Aron, Counsel, Office of the General Counsel, (202) 418-6621, 
daron@cftc.gov, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581; SEC: Matthew A. 
Daigler, Senior Special Counsel, (202) 551-5500, Donna Chambers, 
Special Counsel, (202) 551-5500, or Leah Drennan, Attorney-Adviser, 
(202) 551-5500, Division of Trading and Markets, Securities and 
Exchange Commission, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: On July 21, 2010, President Obama signed the 
Dodd-Frank Act into law.\2\ Pursuant to section 719(d)(1)(A) of the 
Dodd-Frank Act, the Commissions jointly must conduct a study, not later 
than 15 months after the date of enactment of the Dodd-Frank Act, to 
determine whether SVCs fall within the definition of a swap.\3\ Section 
719(d)(1)(A) of the

[[Page 53163]]

Dodd-Frank Act also requires the Commissions, in making such 
determination, jointly to consult with the Department of Labor, the 
Department of the Treasury, and the State entities that regulate the 
issuers of SVCs.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376 (2010). The text of the Dodd-
Frank Act is available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf.
    \3\ The term ``swap'' is defined in Commodity Exchange Act 
(``CEA'') section 1a(47), 7 U.S.C. 1a(47). The term ``security-based 
swap'' is defined as an agreement, contract, or transaction that is 
a ``swap'' (without regard to the exclusion from that definition for 
security-based swaps) and that also has certain characteristics 
specified in the Dodd-Frank Act. See section 3(a)(68) of the 
Securities Exchange Act of 1934, 15 U.S.C. 78c(a)(68). Thus, a 
determination regarding whether SVCs fall within the definition of a 
swap also is relevant to a determination of whether SVCs fall within 
the definition of the term ``security-based swap.'' These terms are 
the subject of further definition in joint proposed rulemaking by 
the Commissions. See Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping, File No. S7-16-11, 76 
FR 29818 (May 23, 2011) (``Product Definitions Proposing Release''). 
Citations herein to provisions of the Commodity Exchange Act and the 
Securities Exchange Act of 1934 refer to the numbering of those 
provisions after the effective date of Title VII.
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    If the Commissions determine that SVCs fall within the definition 
of a swap, they jointly must determine if an exemption for SVCs from 
the definition of a swap is appropriate and in the public interest.\4\ 
Until the effective date of any regulations enacted pursuant to Section 
719(d) of the Dodd-Frank Act, and notwithstanding any other provision 
of Title VII of the Dodd-Frank Act, the Title VII requirements will not 
apply to SVCs.\5\
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    \4\ See section 719(d)(1)(B) of the Dodd-Frank Act. Pursuant to 
section 719(d)(1)(B) of the Dodd-Frank Act, ``The Commissions shall 
issue regulations implementing the determinations required under 
this paragraph.''
    \5\ See section 719(d)(1)(C) of the Dodd-Frank Act.
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    Section 719(d)(2) of the Dodd-Frank Act defines a ``stable value 
contract'' as:

any contract, agreement, or transaction that provides a crediting 
interest rate and guaranty or financial assurance of liquidity at 
contract or book value prior to maturity offered by a bank, 
insurance company, or other State or federally regulated financial 
institution for the benefit of any individual or commingled fund 
available as an investment in an employee benefit plan (as defined 
in section 3(3) of the Employee Retirement Income Security Act of 
1974, including plans described in section 3(32) of such Act) 
subject to participant direction, an eligible deferred compensation 
plan (as defined in section 457(b) of the Internal Revenue Code of 
1986) that is maintained by an eligible employer described in 
section 457(e)(1)(A) of such Code, an arrangement described in 
section 403(b) of such Code, or a qualified tuition program (as 
defined in section 529 of such Code).\6\
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    \6\ The Commissions understand that a bank, insurance company, 
or other state or federally regulated financial institution that 
offers an SVC is commonly referred to as an ``SVC provider.''

    The Commissions' staffs understand that stable value funds 
(``SVFs'') are a type of investment commonly offered through 401(k) and 
other defined contribution plans with the objective of providing 
preservation of principal, liquidity, and current income at levels that 
are typically higher than those provided by money market funds.\7\ The 
Commissions' staffs further understand that SVCs are components of SVFs 
that SVF sponsors or managers purchase from SVC providers, including 
banks and insurers, that provide a guarantee, or ``wrap,'' by the 
service provider to pay plan participants at ``book value'' should the 
market value of the SVF be worth less than the amount needed to pay 
that book value.\8\ In furtherance of this SVC study, the Commissions' 
staffs seek responses to the any or all of the questions below. 
Commenters are encouraged to provide additional relevant information, 
including empirical evidence where appropriate and to the extent 
feasible, beyond that called for by these questions.
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    \7\ See, e.g., U.S. Government Accountability Office, 401(K) 
Plans: Certain Investment Options and Practices That May Restrict 
Withdrawals Not Widely Understood, at 10-11, GAO-11-234 (Washington, 
DC: Mar. 10, 2011); Proposed Exemptions From Certain Prohibited 
Transaction Restrictions, Department of Labor, 75 FR 61932, 61938 
(Oct. 6, 2010).
    \8\ See 401(K) Plans: Certain Investment Options and Practices 
That May Restrict Withdrawals Not Widely Understood, supra note 7, 
at 11. In the context of an SVC, the staffs understand, based on 
conversations with market participants, that the term ``book value'' 
means investment principal plus interest accrued using the crediting 
rate formula determined for the SVF and set forth in the SVC.
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Swap Definitional and Exemptive Issues

    1. Do SVCs possess characteristics that would cause them to fall 
within the definition of a swap? If so, please describe those 
characteristics.
    2. What characteristics, if any, distinguish SVCs from swaps?
    3. Does the definition of the term ``stable value contract'' in 
Section 719(d)(2) of the Dodd-Frank Act encompass all of the products 
commonly known as SVCs?
    4. Are the proposed rules and the interpretive guidance set forth 
in the Product Definitions Proposing Release \9\ useful, appropriate, 
and sufficient for persons to consider when evaluating whether SVCs 
fall within the definition of a swap? If not, why not? Would SVCs 
satisfy the test for insurance provided in the Product Definitions 
Proposing Release? Why or why not? Is additional guidance necessary 
with regard to SVCs in this context? If so, what further guidance would 
be appropriate? Please explain.
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    \9\ See supra note 3. The Commissions note that any comment 
submitted in response to this question will be taken into 
consideration by the Commissions as they consider any final action 
on the Product Definitions Proposing Release.
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    5. If the Commissions were to determine that SVCs fall within the 
definition of a swap, what would be their underlying reference asset?
    6. If the Commissions were to determine that SVCs fall within the 
definition of a swap, what facts and considerations, policy and 
otherwise, would support exempting SVCs from the definition of a swap? 
What facts and considerations, policy and otherwise, would not support 
exempting SVCs from the definition of a swap?
    7. If the Commissions were to (a) Determine that SVCs fall within 
the definition of a swap but provide an exemption from the definition 
of a swap, (b) determine that SVCs fall within the definition of a swap 
and not provide an exemption from such definition, or (c) determine 
that such contracts are not swaps, what beneficial or adverse 
regulatory or legal consequences, if any, could result? For example, 
could any of such determinations lead to beneficial or adverse 
treatment under the Employee Retirement Income Security Act 
(``ERISA''), bankruptcy law, tax law, or accounting standards, as 
compared to the regulatory regimes applicable to SVCs, in the event 
that the Commissions were to determine that SVCs are not swaps or grant 
an exemption from the definition of a swap?

Market and Product Structure Issues

    8. What are the different types of SVCs, how are they structured, 
and what are their uses? Please describe in detail.
    9. Please describe the operation of SVCs and SVFs generally in 
terms of contract structure, common contract features, investments, 
market structure, SVC providers, regulatory oversight, investor 
protection, benefits and drawbacks, risks inherent in SVCs, and any 
other information that commenters believe the Commissions should be 
aware of in connection with the SVC study.
    10. What provisions of SVCs, if any, allow SVC providers to 
terminate SVCs that prevent benefit plan investors from transacting at 
book value? What are the trade-offs, including the costs and benefits 
of such provisions? Please describe in detail.
    11. Describe the benefits and risks of SVCs for SVC providers. How 
do SVC providers mitigate those risks? Please provide detailed 
descriptions. How effective are any such measures?
    12. Describe the benefits and risks of SVCs for investors in SVFs. 
Please provide detailed descriptions.
    13. The Commissions' staffs understand that SVC providers sometimes 
negotiate so-called ``immunization'' provisions with SVF managers and 
that such provisions typically allow SVC providers (or SVF managers) to 
terminate the SVCs based upon negotiated triggers, which can include 
underperformance of the portfolio against a benchmark. The Commissions' 
staffs also understand that, once immunization provisions have been 
triggered and are in effect, the

[[Page 53164]]

SVF must be managed according to the immunization guidelines, which 
typically require the liquidation of all securities rated below AAA and 
in certain cases may require the portfolio to be invested 100% in 
Treasury securities. What risks, if any, do ``immunization'' provisions 
in SVCs pose to investors in SVFs? If immunization provisions in SVCs 
pose risks to investors in SVFs, are these risks clearly disclosed to 
investors? Are these risks required to be disclosed to investors? What 
are the sources of such requirements? How do SVF managers or SVC 
providers address the risk that immunization will be exercised? How 
effective are any such measures?
    14. The Commissions' staffs understand that some SVCs grant SVC 
providers the right to limit coverage of employer-driven events or 
employee benefit plan changes. Such events or changes could cause a 
decrease in a SVF's value and result in large scale investor 
withdrawals or redemptions (sometimes called a ``run on the fund''). 
How do SVC providers and SVF managers manage this risk, if at all? How 
effective are any such measures?
    15. The Commissions' staffs understand that SVF managers infuse 
capital into their funds in certain instances. Please describe the 
circumstances under which an SVF fund manager would provide such 
capital support for its fund.
    16. The Commissions' staffs understand that ``pull to par'' 
provisions of SVCs provide that SVCs will not terminate (absent the 
application of another contract termination provision) until the gap 
between the market value of the wrapped assets and the SVC book value 
is closed, however long that takes. The Commissions' staffs also 
understand that pull to par provisions are standard for SVCs. Are these 
understandings correct? Please describe pull to par provisions and how 
prevalent such provisions are in SVCs.
    17. How have SVFs and SVCs been affected by the recent financial 
crisis? How many SVC providers are in the market today? Is the number 
of SVC providers higher or lower than prior to the financial crisis 
that began in 2008? Are fees now higher or lower than prior to the 
financial crisis?
    18. Do investors have incentives to make a run on a SVF when its 
market-to-book ratio is substantially below one? What protections, if 
any, do SVCs provide to protect fund investors who do not redeem their 
fund shares amid a run on the fund? How effective are any such 
protections?
    19. How do market risk measures assess the risk of a run on a SVF? 
To the extent that SVC providers use value-at-risk (``VaR'') models, do 
such VaR models adequately assess the risk of loss resulting from such 
events or other possible but extremely unlikely events? Do other loss 
models more adequately assess the risk of loss, such as the expected 
value of a loss or the expected value given a loss, which employs the 
entire loss probability distribution without excluding events in the 
extreme tail of the loss distribution?
    20. Are certain SVC providers more likely, as a result of credit 
cyclicality, to become financially distressed? If so, is such financial 
distress likely to occur concurrently with financial distress of SVFs? 
If so, can the risk of such concurrent financial distress be mitigated? 
How effective are any such measures?
    21. Do SVC providers pose systemic risk concerns? Are there 
concerns with entities that may be systemically important institutions 
providing SVCs? What are the consequences for SVFs, employee benefit/
retirement plans, and the financial system should an SVC provider fail?
    22. Are there issues specific to financial institutions providing 
SVCs, including institutions that are systemically significant, that 
the Commissions should consider in connection with the SVC study? If 
so, please describe.

Regulatory Issues

    23. What disclosures to benefit plan investors in SVFs currently 
are required, and what are the sources of such requirements? What 
additional disclosure typically is provided, either voluntarily or on 
request? What additional disclosure, if any, would be warranted and why 
would it be warranted? Please explain in detail.
    24. What financial and regulatory protections currently exist that 
are designed to ensure that SVC providers can meet their obligations to 
investors, and what are the sources of such protections? Does the level 
of protection vary depending on the SVC provider? How effective are any 
such measures?
    25. Currently, do entities other than state-regulated insurance 
companies and federally- or state-regulated banks provide SVCs? If so, 
what kinds of entities do so and how are they regulated? If not, are 
there any barriers to the provision of SVCs by entities other than 
state-regulated insurance companies and federally- or state-regulated 
banks?
    26. What role do SVF managers play in protecting the interests of 
plan participants with respect to SVFs? How effective are any such 
measures?

Compliance Issues if the Commissions Were To Determine SVCs Were Swaps

    27. If the Commissions were to determine that SVCs fall within the 
definition of a swap and should not be exempted from such definition, 
should the regulatory regime for SVCs be limited or tailored in any 
way? If so, how? Please explain in detail. Should any of the 
requirements for capital and margin for SVCs differ from those for 
swaps that are not SVCs? Why or why not? If the requirements for 
capital and margin should differ, please explain in detail what those 
differences should be.
    28. If the Commissions were to determine that SVCs fall within the 
definition of a swap and should not be exempted from such definition, 
would the requirements of any regulatory regime for swaps impact fee 
structures or fees charged by SVC providers? Please describe 
(quantitatively, if possible) the relationship of any new federal 
regulation under the Dodd-Frank Act to possible changes in fee 
structures or fees, to the extent feasible, and state any assumptions 
used in quantifying such relationship.
    29. If the Commissions were to determine that SVCs fall within the 
definition of a swap and should not be exempted from such definition, 
would this decision influence the availability of SVFs to investors? 
Would this designation affect existing SVFs and the ability of SVFs to 
purchase SVCs? If so, how and why?

    Dated: August 18, 2011.

    By the Commodity Futures Trading Commission.
David A. Stawick,
Secretary.
    Dated: August 18, 2011.

    By the Securities and Exchange Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21645 Filed 8-24-11; 8:45 am]
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